December 19, 2008

Dramatic Collapse of the American Auto Industry

After the American Century

]Update: In 1212 I can look back and see that the Obama Administration did save GM and Chrysler. Not only that, but GMis once again the world's largest car maker. No thanks to the Republicans, however, who were ready to let Detroit die. However, this piece accurately reflects the apprehension and gloom that was widespread in the autumn of 2008.]

It is a dramatic story, the collapse of what used to be the core of American industry. A century ago the automobile industry was rapidly growing in Detroit, with many of the most dynamic companies long since forgotten. The Reo, the Hudson, and the Packard are long gone now. Yet what emerged by 1930 was not quite a monopoly but what came to be called "The Big Three" - beside which remained a few small fry another thirty years, such as Studebaker and Nash Rambler. But the Big Three seemed the stuff of industrial immortality - dominating the US market and expanding into foreign lands as well.

Curiously, the relative strength of the three is inversely related to their age. Walter Chrysler's company is the youngest, though that is not why it is now the weakest. General Motors came about as the merger of five automakers and surpassed the older Ford Motor Company (founded in 1903) to become the world's largest car company, a position it retained for decades.

This is not the place to analyze the gradual decline and fall of all three companies, which would take volumes. But none can doubt that these companies lost their technological edge, with many improvements coming from Europe and Japan. The latter particularly excelled at superior productive systems, requiring fewer workers to produce cars, and offering automobiles with far fewer production mistakes as well.

Yet the current malaise of the industry is also related to its poor leadership on environmental matters. Detroit executives have continually resisted pressures to raise the average miles per gallon of their fleet, and sought ways to escape legal requirements in this area altogether, notably by selling ordinary households SUVs and trucks. In the 1980s and 1990s, a time when less than 3% of all Americans are farmers, the sale of gas-guzzling trucks shot up. Meanwhile, Honda, Toyota, and other foreign producers not only produced more efficient cars, but they began to do so inside the United States.

As a result, where once American lawmakers would rally to support Detroit, today no one has much appetite for the job. Southern lawmakers often have a European or Japanese automobile plant in their state, and they also are typically keen on the idea of free market capitalism. Subsidies are not their way. Environmentalists are disgusted with Detroit's foot-dragging on pollution and car efficiency. The great middle class may be sympathetic to the plight of the workers, but they often own foreign cars themselves, and they suspect that the automobile magnates have made their own problem. Conservatives generally do not want to help the car companies unless they negotiate much less advantageous deals with labor. (In fact, the major cost of making cars is not labor, but this point is lost in most debate.)

Support for the automobile companies is strongest in the states where the jobs will disappear if they collapse entirely - Michigan, Ohio, Indiana, Illinois, and certain districts where assembly plants are located. But so far this local support has not been enough, and no clear plan has yet been developed to save the Big Three.

Worst of all, it is not easy to fix the problems these manufacturers face. It takes years to get from the blueprint of a new model to a factory producing it and a team of mechanics ready to service it. But the Big Three do not have years. GM and Chrysler are almost bankrupt now, and the billions they need will not come from banks. Ford is a little better off, and says it does not need federal money immediately. But the other two do, and even though they have closed down their plants for up a month at Christmas, their debt keeps increasing, because of all the retired autoworkers whose pensions must be paid, because corporate debt must be serviced, and because even non-productive factories have heating bills, insurance, and other fixed costs that keep running.

Meanwhile, the few consumers who are visiting automotive showrooms rightfully worry about purchasing any American car. What good is a guarantee if the company dies? Where are spare parts going to come from, if the manufacturer ceases to exist? This problem is going to get worse before it can conceivably get better. Yet with three million jobs on the line, the collapse of the car industry is just not an acceptable option for either state or national government.

The fate of the automobile companies is a close parallel to the fate of the "American century." We seem suddenly to be entering the afterlife of a once powerful economy.